Productivity growth in America may not be dead after all

Over the last 13 years, US labor productivity has grown about
1.4% per year, well below the 2.2% long-run trend for the economy
since World War II.

And in his book on the topic published earlier this year —
"The
Rise and Fall of American Growth" — economist Robert Gordon
outlined what has become the definitive case for why this low
productivity trend is likely to persist.

Gordon's argument is basically that during the early and middle
parts of the 20th century, a bunch of things happened — the
invention of microwave ovens, the standardization of running
water, etc. — that only happen once. Hence, economic benefits
from these innovations won't be repeated.

Think of this as something like the "super secular stagnation"
worldview.

And low productivity means less economic output per worker and a
slower increase in living standards. It is bad.

But in a note to clients published on Tuesday, Deutsche Bank
strategist Binky Chadha argues that for all the hand-wringing
about the economy being fated to a future of less growth and
prosperity, it turns out that economic conditions like we have
now are a boon to improvements in worker productivity.

Since World War II, the US has seen two periods of huge
productivity gains. Ahead of the second of those boom periods, in
the years between 1995 and 2003, economic conditions looked a lot
like they do today: The labor market was tightening, and the US
dollar was strong.

From the middle of 1995 through the end of 2003, worker
productivity grew 3.2% a year — the strongest period for worker
productivity gains since the 1960s.

Data from Chadha's colleague Torsten Slok shows that as of the
August jobs report there were 1.3 available unemployed workers
per job opening in the US. In 2009, there were six.

Deutsche
Bank

Additionally, declining profits require employers to seek more
output from existing workers. Chadha notes that productivity
jumped 7.5% during the financial crisis. Corporate profits
have been under pressure over the last two years or so.

A strong US dollar also "reduces the competitiveness of US firms,
creating incentives for improving productivity in response,"
Chadha writes.

And the pressure corporate profits have faced in the last couple
of years have, in large part, been attributed to the strong
dollar and tumbling commodity prices.

In corporate America, broad economic forces like a strong labor
market and a strong US dollar weigh on the ability for US
corporates to maintain the record-high
profitability they enjoyed after the financial crisis. In
economics circles, we have officials like Minneapolis Federal
Reserve Bank President Neel Kashkari
piggybacking off Gordon's work, arguing, "I doubt Twitter and
Facebook are net productivity enhancers."

But rather than being permanent "new normals," it seems we're
closer to the beginning of a new productivity growth cycle than
the beginning of some paradigm-bending new reality for the US
economy.

Like Chadha, Neil Dutta at Renaissance Macro
argued in August that productivity gains often follow tight
labor markets and employers who realize there is no other way to
grow but to get more from what you've already got.